3/5/2017 G.R.No.

L28896

TodayisSunday,March05,2017

CustomSearch

RepublicofthePhilippines
SUPREMECOURT
Manila

FIRSTDIVISION

G.R.No.L28896February17,1988

COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
ALGUE,INC.,andTHECOURTOFTAXAPPEALS,respondents.

CRUZ,J.:

TaxesarethelifebloodofthegovernmentandsoshouldbecollectedwithoutunnecessaryhindranceOntheother
hand,suchcollectionshouldbemadeinaccordancewithlawasanyarbitrarinesswillnegatetheveryreasonfor
governmentitself.Itisthereforenecessarytoreconciletheapparentlyconflictinginterestsoftheauthoritiesand
thetaxpayerssothattherealpurposeoftaxation,whichisthepromotionofthecommongood,maybeachieved.

ThemainissueinthiscaseiswhetherornottheCollectorofInternalRevenuecorrectlydisallowedtheP75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollaryissueiswhetherornottheappealoftheprivaterespondentfromthedecisionoftheCollectorofInternal
Revenuewasmadeontimeandinaccordancewithlaw.

Wedealfirstwiththeproceduralquestion.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amountofP83,183.85asdelinquencyincometaxesfortheyears1958and1959.1OnJanuary18,1965,Algueflied
a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the
petitioner.2OnMarch12,1965,awarrantofdistraintandlevywaspresentedtotheprivaterespondent,throughitscounsel,
Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the
docketsofthecaseprovedfruitless.Atty.GuevaraproducedhisfilecopyandgaveaphotostattoBIRagentRamonReyes,
whodeferredserviceofthewarrant. 4OnApril7,1965,Atty.GuevarawasfinallyinformedthattheBIRwasnottakingany
action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5
Sixteendayslater,onApril23,1965,AlguefiledapetitionforreviewofthedecisionoftheCommissionerofInternalRevenue
withtheCourtofTaxAppeals.6

Theabovechronologyshowsthatthepetitionwasfiledseasonably.AccordingtoRep.ActNo.1125,theappeal
maybemadewithinthirtydaysafterreceiptofthedecisionorrulingchallenged.7Itistruethatasarulethewarrant
ofdistraintandlevyis"proofofthefinalityoftheassessment" 8andrendershopelessarequestforreconsideration," 9 being
"tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstanceinthecaseatbarthatpreventsapplicationofthisaccepteddoctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it
fileditsletterofprotest.Thiswasapparentlynottakenintoaccountbeforethewarrantofdistraintandlevywas
issuedindeed,suchprotestcouldnotbelocatedintheofficeofthepetitioner.ItwasonlyafterAtty.Guevaragave
theBIRacopyoftheprotestthatitwas,ifatall,consideredbythetaxauthorities.Duringtheinterveningperiod,
thewarrantwasprematureandcouldthereforenotbeserved.

AstheCourtofTaxAppealscorrectlynoted,"11theprotestfiledbyprivaterespondentwasnotproformaandwasbased
onstronglegalconsiderations.ItthushadtheeffectofsuspendingonJanuary18,1965,whenitwasfiled,thereglementary
periodwhichstartedonthedatetheassessmentwasreceived,viz.,January14,1965.Theperiodstartedrunningagainonly
on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the
warrantwasfinallyservedonit.Hence,whentheappealwasfiledonApril23,1965,only20daysofthereglementaryperiod
hadbeenconsumed.

http://www.lawphil.net/judjuris/juri1988/feb1988/gr_l_28896_1988.html 1/4
3/5/2017 G.R.No.L28896
Nowforthesubstantivequestion.

ThepetitionercontendsthattheclaimeddeductionofP75,000.00wasproperlydisallowedbecauseitwasnotan
ordinaryreasonableornecessarybusinessexpense.TheCourtofTaxAppealshadseenitdifferently.Agreeing
withAlgue,itheldthatthesaidamounthadbeenlegitimatelypaidbytheprivaterespondentforactualservices
rendered.Thepaymentwasintheformofpromotionalfees.ThesewerecollectedbythePayeesfortheirworkin
the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
propertiesofthePhilippineSugarEstateDevelopmentCompany.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personalholdingcompanyincome12butlaterconformedtothedecisionoftherespondentcourtrejectingthisassertion.
13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was
distributedIthasbeenestablishedthatthePhilippineSugarEstateDevelopmentCompanyhadearlierappointedAlgueasits
agent,authorizingittosellitsland,factoriesandoilmanufacturingprocess.Pursuanttosuchauthority,AlbertoGuevara,Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties.15 For this sale, Algue received as
agentacommissionofP126,000.00,anditwasfromthiscommissionthattheP75,000.00promotionalfeeswerepaidtothe
aforenamedindividuals.16

Thereisnodisputethatthepayeesdulyreportedtheirrespectivesharesofthefeesintheirincometaxreturns
andpaidthecorrespondingtaxesthereon.17TheCourtofTaxAppealsalsofound,afterexaminingtheevidence,thatno
distributionofdividendswasinvolved.18

The petitioner claims that these payments are fictitious because most of the payees are members of the same
familyincontrolofAlgue.Itisarguedthatnoindicationwasmadeastohowsuchpaymentsweremade,whether
bycheckorincash,andthereisnotenoughsubstantiationofsuchpayments.Inshort,thepetitionersuggestsa
taxdodge,anattempttoevadealegitimateassessmentbyinvolvinganimaginarydeduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara,andtheaccountant,CeciliaV.deJesus,testifiedthatthepaymentswerenotmadeinonelumpsumbut
periodicallyandindifferentamountsaseachpayee'sneedarose. 19Itshouldberememberedthatthiswasafamily
corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even
so,attheendoftheyear,whenthebooksweretobeclosed,eachpayeemadeanaccountingofallofthefeesreceivedby
him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was
understandable,however,inviewofthecloserelationshipamongthepersonsinthefamilycorporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commissionpaidbythePhilippineSugarEstateDevelopmentCo.totheprivaterespondentwasP125,000.00. 21
After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of
P75,000.00was60%ofthetotalcommission.Thiswasareasonableproportion,consideringthatitwasthepayeeswhodid
practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the
SugarEstateproperties.ThisfindingoftherespondentcourtisinaccordwiththefollowingprovisionoftheTaxCode:

SEC. 30. Deductions from gross income.In computing net income there shall be allowed as
deductions

(a)Expenses:

(1)Ingeneral.Alltheordinaryandnecessaryexpensespaidorincurredduringthetaxableyearin
carrying on any trade or business, including a reasonable allowance for salaries or other
compensationforpersonalservicesactuallyrendered...22

andRevenueRegulationsNo.2,Section70(1),readingasfollows:

SEC.70.Compensationforpersonalservices.Amongtheordinaryandnecessaryexpensespaidor
incurredincarryingonanytradeorbusinessmaybeincludedareasonableallowanceforsalariesor
other compensation for personal services actually rendered. The test of deductibility in the case of
compensationpaymentsiswhethertheyarereasonableandare,infact,paymentspurelyforservice.
Thistestanddeductibilityinthecaseofcompensationpaymentsiswhethertheyarereasonableand
are,infact,paymentspurelyforservice.Thistestanditspracticalapplicationmaybefurtherstated
andillustratedasfollows:

http://www.lawphil.net/judjuris/juri1988/feb1988/gr_l_28896_1988.html 2/4
3/5/2017 G.R.No.L28896
Anyamountpaidintheformofcompensation,butnotinfactasthepurchasepriceofservices,isnot
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services,andtheexcessivepaymentcorrespondorbearacloserelationshiptothestockholdingsof
the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered,buttheexcessivepaymentsareadistributionofearningsuponthestock....(Promulgated
Feb.11,1931,30O.G.No.18,325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controllingstockholders.23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
shouldbe,asitwas,sufficientlyrecompensed.

Itissaidthattaxesarewhatwepayforcivilizationsociety.Withouttaxes,thegovernmentwouldbeparalyzedfor
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of
one'shardearnedincometothetaxingauthorities,everypersonwhoisabletomustcontributehisshareinthe
running of the government. The government for its part, is expected to respond in the form of tangible and
intangiblebenefitsintendedtoimprovethelivesofthepeopleandenhancetheirmoralandmaterialvalues.This
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary
methodofexactionbythoseintheseatofpower.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayerhasarighttocomplainandthecourtswillthencometohissuccor.Foralltheawesomepowerofthetax
collector,hemaystillbestoppedinhistracksifthetaxpayercandemonstrate,asithashere,thatthelawhasnot
beenobserved.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondentcourtinaccordancewithRep.ActNo.1125.Andwealsofindthattheclaimeddeductionbytheprivate
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by
thepetitioner.

ACCORDINGLY,theappealeddecisionoftheCourtofTaxAppealsisAFFIRMEDintoto,withoutcosts.

SOORDERED.

Teehankee,C.J.,Narvasa,GancaycoandGrioAquino,JJ.,concur.

Footnotes

1Rollo,pp.2829.

2Ibid.,pp.2942.

3Id.,p.29.

4Respondent'sBrief,p.11.

5Id.,p.29.

6Id,

7Sec.11.

8Phil.PlantersInvestmentCo.Inc.v.Comm.ofInternalRevenue,CTACaseNo.1266,Nov.11,1962
Rollo,p.30.

9VicenteHiladov.Comm.ofInternalRevenue,CTACaseNo.1266,Oct.22,1962Rollo,p.30.

10Ibid.
http://www.lawphil.net/judjuris/juri1988/feb1988/gr_l_28896_1988.html 3/4
3/5/2017 G.R.No.L28896
11PennedbyAssociateJudgeEstanislaoR.Alvarez,concurredbyPresidingJudgeRamonM.Umali
andAssociateJudgeRamonL.Avancea.

12Rollo,p.33.

13Ibid.,pp.78Petition,pp.23.11Id.,p.37.

15Id.

16Id.

17Id.

18Id.

19RespondentsBrief,pp.2532.

20Ibid.,pp.3032.

21Rollo,p.37.

22NowSec.30,(a)(1)(A.),NationalInternalRevenueCode.

23Respondent'sBrief,p.35.

TheLawphilProjectArellanoLawFoundation

http://www.lawphil.net/judjuris/juri1988/feb1988/gr_l_28896_1988.html 4/4